Markets now focus on Fed’s Yellen for further cues

The Fed is in a comfortable position to weaken its currency much more effectively as compared to the ECB. Even though the central bank is widely expected to raise interest rates, the fear among the markets that the Fed might not deliver an interest rate hike caused the dollar to depreciate recently. This leaves the Fed ample room to weaken its currency if it wanted to do so.

If the Fed decides to let go of its rate hike cycle and instead embarks on monetary policy easing, a notable correction of the USD exchange rates will be seen. This explains USD's sensitive reaction to poor U.S. data.

Markets now await Fed chair Janet Yellen testimony on Wednesday for further cues on the USD moves.